Electronic Transaction Clearing, Inc.

Electronic Transaction Clearing, Inc. fined $3 million dollars for failing to reasonably supervise for potentially manipulative trading. The findings stated that the firm did not reasonably surveil for certain forms of manipulation such as marking the open or close, prearranged trading, and wash sales.

Further, the firm’s review of surveillance alerts was unreasonable. The firm had limited staff and other resources to sufficiently review and resolve alerts for potentially manipulative trading. As a result, the firm failed to review more than one million alerts that exceeded its vendor-provided system’s scoring threshold for potential manipulative trading and, therefore, required review.

There were also significant delays in reviews of the firm’s in-house system’s surveillance alerts. In addition, the firm permitted first-level reviewers to close surveillance alerts without any oversight or supervision by a firm principal and failed to have reasonably designed written supervisory procedures concerning how to review for potentially manipulative trading.

Furthermore, the firm did not reasonably respond to red flags of customers’ potentially manipulative trading. The findings also stated that the firm failed to establish and implement anti-money laundering (AML) policies and procedures reasonably designed to detect and cause the reporting of suspicious activity. The firm failed to reasonably surveil trading, including by failing to review over one million alerts generated by its surveillance systems, or otherwise respond to red flags of suspicious activity for purposes of determining whether to file a Suspicious Activity Report (SAR).

The firm also failed to implement reasonable procedures for filing SARs when it detected suspicious transactions. As a result, the firm failed to file SARs in certain instances in which it had identified suspicious activity.

The findings also included that the firm’s market access controls and supervisory procedures were not reasonably designed. The firm did not document the rationale for its financial risk management controls, including its clients’ credit controls and its erroneous order controls.

Further, the firm’s price controls for sponsored access clients were not reasonably designed to prevent the entry of erroneous orders because, absent additional controls, the parameters were too permissive to be effective.

The firm also improperly allocated responsibility for financial risk controls to an introducing broker and failed to comply with annual review and certification requirements.

FINRA found that the firm did not take reasonable steps to ensure that intermarket sweep orders (ISOs) did not trade through protected quotes.

Please see the full detail on this FINRA Case #20170556575 here.